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Quicken pitches ARMs as rising rates put end to refinancing boom

Quicken Loans Inc., the online home lender that jumped last year to No. 3 in U.S. originations, is pitching more adjustable mortgages as rising rates put an end to the refinancing boom.

About 20 percent of Quicken applications are for adjustable rates, up from 5 percent earlier this year, said Bob Walters, vice president of its capital markets group. The loans, which typically have fixed rates for set periods before adjusting, are now a better option than 30-year fixed mortgages for many borrowers, including people refinancing fixed loans, since they probably won't own their home for three decades, he said.

"People on average move every seven to 10 years," Walters, who's also Quicken's chief economist, said in an interview in New York. "All that security they're paying for with a higher rate generally isn't used."

Mortgage lenders are looking for ways to keep borrowers coming as rising rates choke off demand, especially for refinancing, where applications have dropped 57 percent from this year's high in May. Wells Fargo & Co., the biggest U.S. home lender, expects volume to slide the rest of this year, and JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon predicted "a dramatic reduction in profits."

Rising rates

Borrowing costs are climbing because of speculation the Federal Reserve will scale back its effort to stimulate the economy with low interest rates. The impact on mortgage securities has been uneven, widening the gap in June between 5-year adjustable mortgages and 30-year traditional loans to the biggest since at least 2004.

Nationally, rates on 30-year fixed mortgages have climbed to 4.4 percent, from a near-record low 3.35 percent in early May. Five-year ARMs climbed to 3.19 percent, from 2.56 percent, according to Freddie Mac surveys. The difference between the two reached 1.38 percentage points in the last week of June.

That gap is where Quicken sees an opportunity, Walters said. His Detroit-based firm this week was offering 5-year ARMs at 2.88 percent and 30-year fixed loans for 4.25 percent, according to its website. The pitch for the ARMs, which it calls "Amazing 5 Mortgages," was anchored in the center of the lender's home page.

Last year, which Walters called "the best of times" for industry volumes and margins, his firm overtook Bank of America Corp. and U.S. Bancorp to become the No. 3 originator in the fourth quarter, up from 34th in 2006, according to newsletter Inside Mortgage Finance. Bank of America has since surpassed Quicken for the first half of this year. Wells Fargo and JPMorgan remain the largest home lenders.

'Fierce competitor'

The company, owned by billionaire Dan Gilbert, made about $25 billion of mortgages in each of the first two quarters of this year, compared with $70 billion in all of 2012 and $30 billion the year before.

"Quicken is a fierce competitor," said David Lykken, managing partner of the Austin, Texas-based consulting firm Mortgage Banking Solutions. "They like their market share and they will do everything they can to keep it. but they're not going to be stupid about it."

Adjustable-rate loan applications rose to 6 percent of the industrywide total last week from 2.9 percent at the start of the year, according to Mortgage Bankers Association data. With fixed rates projected to gain in the next two years, ARMs will underpin about one-tenth of the market, according to Freddie Mac, the McLean, Virginia-based mortgage finance company. That's still down from a peak of 37 percent in 2005.

Housing bust

Adjustable-rate loans were blamed for fueling the housing bubble and subsequent bust that led to a 35 percent slump in home values because they left borrowers facing potentially unaffordable payments later. While that tainted their reputation, "it had very little to do with ARMs and everything to do with terrible underwriting," Walters said. "Subprime fixed-rate loans also blew up."

At the same time, "there are certain risks inherent in ARMs that aren't in fixed-rate" mortgages, said Keith Gumbinger, vice president of HSH.com, a Riverdale, New Jersey- based mortgage data firm. Adjustments are tied to short-term interest rate benchmarks, which the Fed has held near zero since 2008. The trick for borrowers is whether they can move or refinance before those rates head back toward their historic levels, which exceeded 5 percent as recently as 2007, or save enough in the meantime.

'Good fit'

"There are some audiences for whom refinancing into ARMs are a good fit," Gumbinger said. "If you are within a handful of years to retirement age, you only need a mortgage with a handful of years of a fixed rate."

The most dangerous ARMs aren't available in the market anymore, he said. Those included mortgages whose balances could increase and payments that could double.

Quicken's business model differs from most of its rivals. It eschews branches and relationships with mortgage brokers or other independent lenders and grants loans almost solely through its website and call centers. In 2010, it began to strike deals with community banks to fund loans to their customers on a co- branded basis.

The firm built a reputation for customer service with J.D. Power and Associates awards for the past three years. It also advertises on television and online, buys leads from aggregators such as LowerMyBills.com and has started sponsoring a Nascar racing team.

Playing HARP

It's also seeking business by sending out books that open to play videos on screens aimed at borrowers who still hold high-rate mortgages and may be eligible to tap the federal Home Affordable Refinance Program, Walters said.

That program is designed for people with little or no home equity, and Quicken is joining San Francisco-based Wells Fargo, which accounted for about one of every three mortgages last year, and Lewisville, Texas-based Nationstar Mortgage Holdings Inc. in saying it may help sustain demand.

Monthly data sent this week to mortgage-bond investors showed higher-rate loans prepaying about as fast or faster than in June, even as a slump among lower-rate loans drove a total 9 percent drop for Fannie Mae 30-year securities, according to JPMorgan analyst Brian Ye.

"The jury is still out on" when the pace might slow among higher-rate loans, Morgan Stanley analyst Vipul Jain wrote this week in a note to clients.

Customer response

The challenge is to get those borrowers, some of who may have been turned down previously, to respond to solicitations, Walters said. Quicken goes after them with general advertising, and also has relationships with loan servicers -- firms that do billing and collections on existing mortgages -- that don't have the ability to originate new ones on their own, he said.

Quicken's ability to strike those relationships was cited by Morgan Stanley and Nomura Securities International analysts last year as helping bolster total HARP lending.

The firm's video books show three 40-second segments, including one with CEO Bill Emerson, to a targeted batch of potential customers in an attempt to use a "wow factor" to catch their attention, Walters said. The company may buy more servicing contracts to get access to more potential customers, he said.

"There's not a lot of firms that have the capital and the 50-state origination capabilities that we do to monetize" the opportunity, he said.